Italian politics was the main cause of increased uncertainty and market volatility in May, although Spanish politics and US protectionism were back in focus as well. European markets reacted in a classic risk off way; bonds were positive while equity markets sold off. Italy of course saw both its debt and equity markets selling off significantly. The S&P 500 was pretty resilient against a backdrop of solid economic data and a strong dollar. Asia and Emerging Markets had a weak month, somewhat because of the dollar’s strength.
Turning to the main cause of market discontent, Italy’s inconclusive election. At the end of the May we finally got the Five Star Movement (5SM)-League coalition, removing the risk of fresh elections, but not without a few very unsettling bumps in the road. Talks between the two populist parties began early in the month after Silvio Berlusconi said he would not veto a coalition between his ally League Nord and 5SM. The League had previously said they would not form a coalition with 5SM without Berlusconi’s approval.
The coalition’s policy platform was indeed pretty market friendly; tax cuts, a basic income and greater fiscal expansion. The cause of worry was a leaked document containing radical draft policies and the coalition’s choice of an overtly eurosceptic Finance Minister, Paolo Savona. The leaked policy draft showed the coalition were considering exiting the euro and planned to ask the ECB to forgive €250bn of Italian debt. The coalition quickly made a joint statement that the document had since been considerably revised, although markets deemed this unlikely given it was written just two days before. Turning to the Eurosceptic Finance Minister, Italy was nearly plunged into constitutional crisis as its President Sergio Mattarella declined the appointment on the basis the coalition has no mandate from the electorate to exit the eurozone. This caused worries about fresh elections in which 5SM and the League may explicitly run eurosceptic campaign; against a backdrop of rising League popularity in the polls. At the eleventh hour however, the coalition did agree on a government with Mattarella’s approval. Giuseppe Conte finds himself as Prime Minister, the problematic Savona is relegated to minister for EU affairs while Giovanni Tria, an economics professor, takes the position of finance minister. 5SM’s leader Luigi Di Maio will lead the country on labour and economic development while Matteo Salvini will lead on immigration.
Spain had its own political turmoil as Prime Minister Mario Rajoy was forced to stand down in a no-confidence vote prompted by corruption allegations against his party. While the story was rather sensational, his replacement is market friendly. The new Prime Minister Pedro Sanchez, leader of the centre left Socialist Workers’ Party (PSOE) is a committed europhile and has said he will stand by EU budget rules. Like Rajoy, he will head up a minority government.
Meanwhile, the Trump administration continued to upset the global order and alienate the US from the rest of the world including its long-standing allies. The latest antagonistic moves included pulling out of the Iran nuclear deal and threatening European companies with sanctions if they continued to do business with the state, announcing steel and aluminium tariffs on previously exempted EU, Canada and Mexico, and finally, 25% tariffs on $50bn of Chinese goods containing “industrially significant technology.”
Anna Haugaard, CFA
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